Presented is the 2009 contribution income statement of Colgate Products. COLGATE
ID: 2519958 • Letter: P
Question
Presented is the 2009 contribution income statement of Colgate Products.
COLGATE PRODUCTS Contribution Income Statement For Year Ended December 31, 2009
Sales (18,000 units) $2,160,000
Less variable costs Cost of goods sold $720,000 Selling and administrative 198,000 (918,000)
Contribution margin 1,242,000
Less fixed costs Manufacturing overhead 750,000 Selling and administrative 320,000 (1,070,000)
Net income $172,000
During the coming year, Colgate expects an increase in variable manufacturing costs of $8 per unit and in fixed manufacturing costs of $108,000.
(a) If sales for 2010 remain at 18,000 units, what price should Colgate charge to obtain the same profit as last year?
(b) Management believes that sales can be increased to 24,000 units if the selling price is lowered to $109. What would be the excepted profit (or loss) as a result of this action? Use a negative sign with your answer, if appropriate.
(c) After considering the expected increases in costs, what sales volume is needed to earn a profit of $172,000 with a unit selling price of $109? Answer units
Explanation / Answer
Answer
(a)
Total Fixed cost in 2010 = $858000 + $320000 = $1178000
Net Income required in 2010 = $172000
Hence total contribution margin required in 2010 = Fixed costs + Net Income = $1178000 + $172000 = $1350000
Cost of goods sold in 2010 = $720000 + (18000 *$8) = $864000
Total Variable cost in 2010 = $864000 + $198000 = $1062000
Sales = Contribution margin + Total Variable costs = $1350000 + $1062000 = $2412000
Hence price Colgate should charge to obtain same profit as last year = $2412000 /18000 units = $134 per unit
(b)
Sales (24000 units * $109) $2,616,000
Less : Variable cost
Cost of goods sold (24000 units * $48) $1,152,000
Selling and admin expenses (24000 units * $11) $264,000
Contribution margin $1,200,000
Less : Fixed costs
Manufacturing Overhead $858,000
Selling and admin expenses $320,000
Expected profit $22,000
(c)
Total Fixed cost in 2010 = $858000 + $320000 = $1178000
Net Income required in 2010 = $172000
Hence total contribution margin required in 2010 = Fixed costs + Net Income = $1178000 + $172000 = $1350000
Contribution per units = Sale price per unit - Cost of goods sold per unit - selling & admin exp.per unit = $109 - $48 - $11 = $50 per unit
Sales volume needed = $1350000 / $50 = 27000 units